Needing guidance on what the correct route to take.

San Diego, California
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Needing guidance on what the correct route to take.

Darrion JacksonPro Member
San Diego CA · Member since 2024 · 12 posts · 12 votes

Hello everyone, 

I am currently looking for guidance with two of my properties. One SFH in Illinois and a Townhouse in San Diego.

I bought the SFH in Illinois for 146000 in 2023. At the time it was bought, it was a primary residence, so I used an FHA loan, and I only put 3.5% down. I am looking to rent it out, but I don't have enough equity in the property to put it into an LLC. I'm wondering what route I should take to reduce my liability while renting it out, or should I just sell it completely? I am also going to be putting in about 10k worth of work to the property to get it ready to rent out, and at the moment, it will only rent for about $200 more than the current mortgage.

When it relates to my townhouse in San Diego, I did buy this with my VA loan. I bought it for 585,000 last year. This property needs work, 60k on the high end. With this property, I want to sell it here soon. I know I will have to pay capital gains tax, but I am okay with that. I am actually okay, if I don't make anything because I am selling to buy a multiunit in San Diego, plus I will represent myself in the transaction to sell the San Diego property and buy the multiunit, so I will make money there at minimum.

I would like to finance the whole 70k to get both properties where they need to be, but I am not sure how I should finance the money to fix up the properties.

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Denise SuppleeBusiness Member
Realtor · Willow Grove, PA · Member since 2017 · 970 posts · 638 votes
4mo

Hello @Darrion Jackson,

With 45+ years in real estate, I’d say don’t rush into anything. A lot of investors get themselves in trouble trying to solve every problem all at once.

On the Illinois property, you do not need an LLC to rent it out. Good landlord insurance and possibly an umbrella policy can go a long way toward reducing liability. Personally, I would look hard at whether the property makes sense long term if it is only cash flowing around $200 before repairs, vacancies, and future expenses.

For the San Diego property, I’d be careful about putting $60K into a place you already plan to sell. I’d focus on the repairs that truly help resale value and skip the rest. Also, cleaning, decluttering and making it look nice from the outside can help as well. 

I hope all works out well for you! I am sure it will.

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  • Travis Main
    Lender · Orlando, FL · Member since 2023 · 220 posts · 183 votes
    4mo

    Hey Darrion, 

    I honestly wouldn't rush to sell the Illinois property just because it's not in an LLC yet. A lot of newer investors think the LLC is the main protection, but having strong landlord insurance and a decent umbrella policy is honestly more important in a lot of cases. Plus with an FHA loan, moving it into an LLC can sometimes create issues depending on the lender and how it's structured.

    The bigger thing I'd look at is whether the property still makes sense as a rental once you factor in real-world expenses. If it's only making about $200/month over the mortgage before vacancy, repairs, maintenance, future CapEx, etc., the margins get pretty thin pretty fast. Doesn't necessarily mean it's a bad hold, but I'd definitely be conservative with the numbers before putting another $10k into it.

    On the San Diego townhouse, I’d definitely talk to a CPA before assuming you’ll owe capital gains. If it’s been your primary residence and you meet the occupancy requirements, there’s a decent chance you may qualify for the primary residence exclusion and avoid a good chunk of taxes.

    As for financing the repairs, I’d probably first look at:

    • HELOC
    • personal line of credit
    • portfolio loan
    • cross-collateral loan
    • or even a bridge loan if you’re planning to transition quickly into the multifamily purchase

    One thing I’d be careful of though is trying to stretch both properties and a new acquisition at the same time. Rehab budgets almost always run higher than expected and timelines usually take longer than people think.

    Honestly, one of the strongest things you probably have right now is the financing already attached to those properties, especially the VA loan. I'd think carefully before giving up low-rate debt unless the next move is clearly putting you in a stronger long-term position.

    1Reply
  • Denise SuppleeBusiness Member
    Realtor · Willow Grove, PA · Member since 2017 · 970 posts · 638 votes
    4mo

    Hello @Darrion Jackson,

    With 45+ years in real estate, I’d say don’t rush into anything. A lot of investors get themselves in trouble trying to solve every problem all at once.

    On the Illinois property, you do not need an LLC to rent it out. Good landlord insurance and possibly an umbrella policy can go a long way toward reducing liability. Personally, I would look hard at whether the property makes sense long term if it is only cash flowing around $200 before repairs, vacancies, and future expenses.

    For the San Diego property, I’d be careful about putting $60K into a place you already plan to sell. I’d focus on the repairs that truly help resale value and skip the rest. Also, cleaning, decluttering and making it look nice from the outside can help as well. 

    I hope all works out well for you! I am sure it will.

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  • Miki Jovanovikj
    Real Estate Broker · Illinois, FL · Member since 2022 · 22 posts · 4 votes
    4mo

    what part of Illinois ? I'm in south west suburbs of Chicago and is that long term rental cashflow. If it's area close to airport, college, hospital etc you can look into midterm or short term rentals so you can create way better cashflow. 
    as for San Diego you can deferre tax hit with 1031 exchange if you buy same or more expensive property. It's worth to invest 60k if you can increase the after Repare values substantially. Bridge loan or hard money to finance but those are expensive loans. Heloc of there is enough equity and now we have arv heloc based on forced equity of there is not enough to pull and it's cheaper than hard money. I hope this helped. Feel free to address any other concerns and good luck on you journey 

    2Reply
  • Jonathan KlemmBusiness Member
    Moderator
    Contractor · Chicago, IL · Member since 2016 · 4k+ posts · 2k+ votes
    4mo

    Hey There @Darrion Jackson - Which part of Illinois is your property in?  Are you near Chicago or further south in central/southern Illinois?

    You got some good advice above - most importantly you do not need an LLC to rent out a property. Plus, you could transfer to an LLC even if it was an FHA loan, you'd just do a quitclaim deed - you just need to be away of the due on sale clause in your loan, but I've yet to hear of anyone being hit with it.

    There is a company called Renofi that will fund your rehab on the after-repair value. Maybe look into that option for the San Diego property.

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  • Aaron ZimmermanBusiness Member
    Accountant · Chicago, IL · Member since 2018 · 2k+ posts · 1k+ votes
    4mo

    On the Illinois property, I'd be verifying rents to make sure your assumptions are right. Perhaps you can get more for it but To me it seems like you'll be out of pocket after factoring in all expenses so might be worth it to sell.

    For the townhouse, why are you looking to sell? Could you do short or medium term rental there instead? 

    could you get the funding for the multifamily elsewhere or partner with someone else?

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  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    4mo

    I've rented many homes for years with no LLC and just good insurance (liability+umbrella). The LLC is unnecessary for what you are looking to do.

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  • Darrion JacksonPro Member
    OP
    San Diego CA · Member since 2024 · 12 posts · 12 votes
    4mo

    Thank you, that eases my nerves a lot! When do you recommend using my LLC? I have one, I just haven't bought any properties with it.

    0Reply
  • Darrion JacksonPro Member
    OP
    San Diego CA · Member since 2024 · 12 posts · 12 votes
    4mo

    @Jonathan Klemm This property is located in Rock Island, Illinois (Right along the border of Illinois and Iowa). Probably better known as the Quad Cities. I would feel more comfortable with putting it in an LLC, but from the responses, it seems like it is only really necessary when buying a property under the LLC.

    1Reply
  • Darrion JacksonPro Member
    OP
    San Diego CA · Member since 2024 · 12 posts · 12 votes
    4mo

    @Aaron Zimmerman for the townhouse I am looking to sell to free my VA loan entitlement. I just bought this house last year in December, so I used all my entitlement.

    I am just trying to think wiser. I'm 23, and currently, I am a realtor and I have a government job. Ideally, I'd like to be in a position to take being a realtor full-time, and securing the multiunit before leaving the government job seems the smartest way to go. Since I just started as a realtor in San Diego, I need 3 years of consistent income in order to use it to qualify for a loan.

    0Reply
  • Darrion JacksonPro Member
    OP
    San Diego CA · Member since 2024 · 12 posts · 12 votes
    4mo

    @Miki Jovanovikj Rock Island, Illinois. This property is within a few minutes of a hospital. In relation to the San Diego townhouse. I was thinking about a 1031 exchange because I don't need any money; I just want to position myself into the multifamily here in San Diego. I am going to talk to a CPA about that, thank you!

    1Reply
  • Darrion JacksonPro Member
    OP
    San Diego CA · Member since 2024 · 12 posts · 12 votes
    4mo

    @Denise Supplee I really appreciate the knowledge. I have to admit the 45 yrs plus in real estate did ease my nerves a lot! Since the FHA loan only required 3.5 percent down, I am considering putting a bit more down to make the payments cash flow a bit more, or just even setting aside an emergency fund for the property itself in case something is needed. My goal with this property and future properties is long-term hold.

    0Reply
  • Jason MalabuteBusiness Member
    Accountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 898 votes
    4mo

    On the Illinois property, I'd start by double-checking actual market rent before deciding the next move. After running real numbers on vacancy, repairs, taxes, insurance, and PM fees, if you're still cash negative each month, that's a fair signal that selling could be the cleaner option. On the San Diego townhouse, before locking in a sale, it's worth asking whether short or medium term rental is on the table since that can sometimes preserve the asset and your low rate while still working toward your bigger plan. And on the rehab funding side, partnering up or pulling capital from another source could let you avoid having to sell just to free up cash for the multifamily. Quick lender note too, self employed income usually only requires two consistent years of history to qualify, not three, so it may be worth checking with a different lender as well. Every situation is different though, so worth running the full picture through your own CPA and lender before making any final calls.

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  • Greg W.
    Buy and Hold Investor · Alexandria, VA · Member since 2013 · 180 posts · 48 votes
    4mo

    If you aren't going to IL on a regular basis, just sell the house. The cash flow will cover repairs but unless it's in an appreciating part of town, it's probably not worth the hassle. Your cash flow will be eaten up by maintenance and capex along with your time managing from a distance.

    0Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    4mo

    @Darrion Jackson, The first property sounds like it might still qualify for the primary residence exemption. Which would allow you to take the first $250K or $500K of profit (if married) tax-free. You're on the right track to use the 1031 exchange, which allows you to position yourself to use the deferred tax to help purchase that MF property.
    You might be able to get an LOC on one of the properties to fix it up.


    Usually, the IRS is skeptical of refinances right before a sale. Because they fear you are trying to access profit tax-free. But many accountants are not so scared of that when you can show that you are putting the money right into the improvement of the property. Or you can get the money from somewhere else, short-term, and then pay it back with an immediate refinance of your new property.

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  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    4mo

    Travis and Denise gave solid advice here. I would not rush to sell or move something into an LLC just because you feel exposed. For the Illinois property, good landlord insurance and possibly an umbrella policy may give you meaningful protection while you confirm whether the rental numbers actually work.

    From a tax standpoint, an LLC by itself does not create tax savings. It is mainly for liability protection and structure. If the property only rents for about $200 over the mortgage before repairs, vacancy, maintenance, CapEx, and management, the real cash flow may be very thin or negative. I would run the numbers conservatively.

    For the San Diego townhouse, be careful assuming there will be a big taxable gain. If it has been your primary residence and you meet the Section 121 rules, you may be able to exclude some or all of the gain. I would focus repairs only on items that clearly improve resale value or help the sale close, especially if your plan is to sell and move into a multifamily.

    If you're looking for a CPA BiggerPockets is a brilliant place to find great CPAs who understand real estate. Many CPAs work remotely now, so you can speak with a few and choose the one that best fits your goals and needs.

    Happy to connect.

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  • Jimmy LieuBusiness Member
    Real Estate Agent · Columbus, OH · Member since 2019 · 3k+ posts · 2k+ votes
    4mo
    Quote from @Darrion Jackson:

    Hello everyone, 

    I am currently looking for guidance with two of my properties. One SFH in Illinois and a Townhouse in San Diego.

    I bought the SFH in Illinois for 146000 in 2023. At the time it was bought, it was a primary residence, so I used an FHA loan, and I only put 3.5% down. I am looking to rent it out, but I don't have enough equity in the property to put it into an LLC. I'm wondering what route I should take to reduce my liability while renting it out, or should I just sell it completely? I am also going to be putting in about 10k worth of work to the property to get it ready to rent out, and at the moment, it will only rent for about $200 more than the current mortgage.

    When it relates to my townhouse in San Diego, I did buy this with my VA loan. I bought it for 585,000 last year. This property needs work, 60k on the high end. With this property, I want to sell it here soon. I know I will have to pay capital gains tax, but I am okay with that. I am actually okay, if I don't make anything because I am selling to buy a multiunit in San Diego, plus I will represent myself in the transaction to sell the San Diego property and buy the multiunit, so I will make money there at minimum.

    I would like to finance the whole 70k to get both properties where they need to be, but I am not sure how I should finance the money to fix up the properties.

    Hey Darrion, sounds like you’re trying to make a smart pivot instead of forcing properties that may not fit your long-term goals anymore, and that’s honestly a good mindset to have. On the Illinois property, not having it in an LLC right away isn’t the end of the world. A lot of landlords hold rentals in their personal name, especially when they used owner-occupied financing like FHA. The bigger thing is making sure you have strong insurance coverage before renting it out. I’d look into a solid landlord policy and probably an umbrella policy too since that can give you a pretty decent liability buffer for relatively cheap. As for cash flow, only being $200 over the mortgage after putting another $10k in would make me personally look very carefully at maintenance, vacancy, CapEx, and management because that margin can disappear fast. On the San Diego townhouse, if you already know it needs major work and your bigger goal is scaling into a multiunit, simplifying and repositioning your capital could make sense. Financing-wise, if you have enough equity between the two properties, a HELOC or fixed second mortgage might be the cleanest route, but rates and monthly payments matter a lot right now, so I’d make sure the numbers still work conservatively after the rehab. I’d also be careful about over-improving either property if the exit strategy is selling soon anyway. Sometimes doing only the highest ROI repairs gets you almost the same resale result without sinking the full budget into it.
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  • Jeffrey Abraham
    Lender · United States · Member since 2020 · 177 posts · 26 votes
    3mo

    Regarding financing the $70,000, you have several possibilities:

    • Home Equity Line of Credit (HELOC), if you have enough equity.
    • Home equity loan.
    • Cash-out refinance (if rates and equity make sense).
    • Renovation or bridge financing.
    • Personal line of credit or unsecured loan, depending on your credit profile.
    0Reply
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